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HMRC internal manual

Shares and Assets Valuation Manual

Capital Gains Tax procedures: connected persons

Where shares are sold to a connected person, Section 18(2) TCGA 1992 requires that the statutory open market value of the shares, if different, be substituted for the consideration received regardless of whether the sale price was agreed after lengthy negotiation or whether the parties were separately advised. SAV is, therefore, asked to negotiate a market value and it is not uncommon to find that the shares have been sold at over value. Often the difference arises because of the rules which apply to the valuation of minority holdings. It may be that SAV needs to take a broader view of the circumstances as a whole since the parties may have been very much at arm’s length with no intention to confer bounty. It should always be remembered that, where connected persons are concerned, one person’s disposal is the other’s acquisition value. Insofar as the latter is concerned, the substitution of a lower value in place of the purchase price could cause difficulties when the shares are subsequently disposed of.

You should refer any case involving a sale between connected persons to your team leader at an early stage.

In any case involving sales between connected persons your first task is to consider whether any possible element of bounty is involved. In doing so you should have regard to the overall circumstances, for example the relationship and the reason for the ‘disposal’, and form a view as to whether the parties were, in fact, at arm’s length. If they were you must have a very good reason to interfere: a view that on a hypothetical statutory market basis the value might be different is not in itself a good reason where the parties were clearly at arm’s length.

If it is decided that we should accept the actual consideration as the open market value, the acceptance should be without prejudice to any other valuation for HMRC purposes, unless you are fully satisfied with the value offered on normal hypothetical open market grounds.

Where the transferor and transferee were clearly at arm’s length, therefore, it will usually be possible to accept the actual consideration as open market value in computing the gain. If the transferor insists that an open market value lower than the actual consideration should be negotiated, you should notify the Inspector who should arrange for the purchaser to be joined in the negotiations (see Chapter 107 of this manual SVM107060).

If the consideration given exceeds the open market value of the shares, you should consider any possible IHT claim in other words

  • on the transferor because, for example, the disposal is out of a control holding and the sale price - although greater than the open market value of the individual holding sold - is not sufficient to satisfy Section 10(2) IHTA 1984 (this is most likely to arise where control itself is lost) or,
  • on the acquirer because the sale price is sufficiently excessive as to contain a clear element of bounty by him.

In the case of disposals made on or after 18 March 1986, most such transfers will be potentially exempt transfers (PETs) under Section 3A IHTA 1984, and the 100% Business Relief which applies to most unquoted shares on or after 6 April 1996 means that IHT implications will be rare.

If it is considered that an IHT claim could arise under either head a further qualification must be added to the letter to safeguard the claim. For example, in the case of the vendor, you should say that acceptance of the sale price ‘is not to be taken as indicating that the requirements of Section 10(2) IHTA 1984 are considered to be satisfied for IHT purposes.’ As regards the acquirer the matter should be discussed with your Team Leader.

Where the sale of shares is between an individual and a connected company (in other words a company controlled by him either alone or jointly with other persons connected with him) and the individual receives the greater benefit from the transaction - in other words as vendor he receives more than, or as a purchaser pays less than, the market value of the shares - there may be tax implications for taxes other than CGT. In particular you should ask the S.94 specialist to consider whether there is any IHT claim under Sections 94-102 IHTA 1984.

Losses on disposals to a connected person are only available against gains on disposals to the same connected person. If, therefore, it appears that a valuation will result in such a loss and the valuation is proving difficult, you should consult with the Inspector as to the likelihood of the losses being able to be set against subsequent gains.

  Additional Guidance: SVM150000